Hong Kong’s red-hot property market

by Lalaine C. Delmendo

Hong Kong’s property market continues to rise. Hong Kong’s residential property price index soared 14.29% (14.4% inflation-adjusted) during the year to February 2017, a sharp turnaround from a y-o-y decline of 6.11% (-8.82% inflation-adjusted) during the same period last year, according to the Ratings and Valuation Department (RVD). Quarter-on-quarter, residential property prices increased 1.99% (1.89% inflation-adjusted) in February 2017.

Real incomes have virtually stagnated in Hong Kong for years. But house prices have tripled from 2003 to 2015.

Housing demand has been propelled by a combination of stringent government regulations on development, low interest rates, and currency stability; while the supply of land, which the government controls, continues to diminish. The latest house price rises come despite the government’s decision to raise stamp duties for all non-first time homebuyers starting November 2016. Demand is surging. House price rises are accelerating. Residential construction activity is rising sharply.

Smaller-sized properties have had the biggest price increases. Prices of apartments smaller than 40 sq. m. surged by 16.3% during the year to February 2017, and apartments 40-69.9 sq. m. rose by 13.9%. Prices of apartments 70-99.9 sq. m. rose by a meager 1.5%, while prices of apartments 100-159.9 sq. m. increased 7.8%. Prices of apartments with sizes bigger than 160 sq. m. rose by 5.9% y-o-y in February 2017.

The total number of property transactions in Hong Kong increased 2.3 times to 4,079 in February 2017 from the same period last year, based on RVD figures, while sales values more than tripled to HK$36.46 billion (US$4.7 billion) over the same period.

Residential construction activity is also rising strongly. Completions rose by 29.4% in 2016 from a year earlier, to 14,595 units, according to the RVD.Likewise, housing starts surged 80% to 25,500 units in 2016 from a year earlier – the highest level since 2000, according to the Transport and Housing Bureau.

From 2008 to 2013, house prices skyrocketed by 134% (95.7% inflation-adjusted), driven by a flood of money in the wake of the global financial crisis.

The market slowed in the first half of 2014, with house prices rising only by 2.9%, due to government cooling measures. But the housing market bounced back quickly in the second half of 2014, with prices rising by 13.6% in Q4 2014, 19.6% in Q1 2015, 20.4% in Q2 2015, and 15% in Q3 2015. After a brief housing market slowdown from Q4 2015 to Q3 2016 amidst Hong Kong’s economic slowdown and decline in tourist arrivals, house prices recovered rapidly by end-2016.

Hong Kong’s property market is expected to remain robust in the coming months, amidst strong domestic and foreign demand and an improvement in economic conditions.

“Whilst domestic demand has been strong, mainland Chinese buyers have been investing in Hong Kong residential properties as a hedge against possible further depreciation of the renminbi,” according to Colliers International.

“Demand in the primary market should remain unaffected by the implementation of the new curbs in the near term, since developers have adopted sales strategies such as offering mortgage financing, discounts on stamp duty, and reducing unit sizes to secure buying interest,” the Colliers report added.

Hong Kong´s economy grew 1.9% in 2016, after growth rates of 2.4% in 2015, 2.7% in 2014, 3.1% in 2013, and 1.7% in 2012, according to the Census and Statistics Department. The economy is expected improve this year, with projected GDP growth of 2% to 3%. This is in line with the International Monetary Fund (IMF)’s projection of a 2.4% growth this year.

Hong Kong property market remains the world’s most unaffordable

In 2009, while property prices were taking a nosedive across the U.S., Hong Kong’s housing market was going into overdrive.

This is in line with Mercer’s 2016 Cost of Living Survey, which ranked Hong Kong the world’s most expensive city for expatriates to live in, up from second-most-expensive the previous year.

Based on UBS Real Estate Bubble Index released in September 2016, Hong Kong remains in “bubble-risk territory” despite the fact that HK house prices were falling during the time when the report was published. “The recent price decrease has brought only minor relief, as buying a flat costs more than 18 years’ income,” UBS noted.

Government closes off stamp duty loophole

In November 2016, the government raised stamp duties for all property transactions to 15%, except for first time homebuyers who are charged just 4.25%. However, house price rises continued to accelerate, amidst a surge in the number of multiple home purchases on one single transaction as investors take advantage of lower tax rates.

In an effort to close the loophole, the government recently announced that first time homebuyers acquiring more than one property in a single contract will be charged the same 15% stamp duty that applies to purchases of a second property starting April 2017.

In recent years, Hong Kong’s government has leaned against the property price rises:

In November 2010, the government imposed a ´flip tax´ of 15% on properties resold within six months (though in May 2014 the rule was somewhat relaxed), and doubled stamp duties to 8.5% on properties worth HK$20 million (US$2.6 million) or more.

On October 26, 2012, the government imposed a 15% extra tax on property purchases made by foreigners.

In February 2013, the government doubled the stamp duty on all property transactions worth more than HK$2 million (US$257,902), though again, this measure ended in May 2014.

In April 2013, the Residential Properties (First-hand Sales) Ordinance to shield buyers from dishonest sales practices came into full effect.

In February 2015, the government required buyers of self-used residential properties valued under HK$7 million (US$900,000) to make larger down payments.

Property sales soaring

The total number of property transactions in Hong Kong increased 2.3 times in February 2017 from the same period last year, based on RVD figures, while sales values more than tripled over the same period.

In February 2017:

Primary market property sales almost doubled to 1,421 units from just 767 a year earlier, while total transaction values more than doubled to HK$6.91 billion (US$888 million), according to the Hong Kong Monetary Authority (HKMA).

Secondary market property sales almost doubled to 3,569 units from a year earlier, while transaction values increased 2.25 times to HK$12.99 billion (US$1.67 billion).

Interest rate hikes

Hong Kong’s currency has been pegged at circa HK$7.8 per U.S. dollar since October 1983, so that when the Federal Reserve increases interest rates, Hong Kong’s interest rates will most likely increase as well.

TheHKMA raised its base rate by 25 basis points to 1.25% in March 2017, the second time in three months following a similar move made by the Fed. Despite this, the best lending rate remained unchanged at 5% in March 2017. It dropped from 5.25% to 5% in December 2008, when the Fed Funds rate declined from 1% to 0.13%, and has been unchanged since then.

In February 2017, the average interest rate on new mortgage loans approved with reference to best lending rate stood at 3%, up from 2.6% in the previous month. Over the same period, the average fixed interest rate for new mortgage loans increased to 1.9%, from 1.8% in the previous month.

New mortgage lending rising sharply

In February 2017, total residential mortgage loans outstanding rose by 5.1% to HK$1.13 trillion (US$145.35 billion) compared to a year ago, according to Hong Kong Monetary Authority (HKMA). In 2016, the size of the mortgage market was equivalent to almost 45% of GDP.

In February 2017, new residential mortgage loans approved almost doubled to 7,404, from 3,926 in the same period last year. Likewise, the value of newly approved residential mortgage loans was HK$27.6 billion (US$3.55 billion) in February 2017, sharply up from just HK$12.76 billion (US$1.64 billion) in a year earlier.

Both the mortgage delinquency ratio (more than 3 months) and the rescheduled loan ratio were unchanged in February 2017, at 0.04% and 0% respectively.

Hong Kong’s rental yields falling; rents rising

Rental yields are generally falling, for all property classes. In February 2017:

Property Class A (properties with an area of 40 sq. m. and below) rental yields were 2.9%, slightly down from 3% a year earlier.

Property Class B (40 to 69.9 sq. m.) rental yields were 2.6%, down from 2.7% a year earlier.

Property Class C (70 to 99.9 sq. m.) rental yields were 2.5%, slightly down from 2.6% a year earlier.

Property Class D (100 to 159.9 sq. m.) rental yields were 2.3%, slightly down from 2.4% a year earlier.

Property Class E (160 sq. m. and above) rental yields were 2%, down from 2.3% a year earlier.

The extremely low rental yields in Hong Kong can be attributed to the surge in property prices in recent years. Hong Kong is not a ‘typical’ market. It is a place where the rich choose to park assets in the form of apartments, as part of a diversified asset-safeguard strategy - like Monaco and Singapore. Such markets typically have lower rental yields than more ‘normal’ housing markets.

Rents are rising for smaller-sized apartments in Hong Kong, while they are falling for bigger-sized apartments.

In February 2017:

Rents for apartments smaller than 40 sq. m. rose by 5.4% y-o-y, to an average of HK$429 (US$55) per sq. m. per month.

Residential construction surging

Completions rose by 29.4% in 2016 from a year earlier, to 14,595 units, according to the RVD. From 2007 to 2015, completions averaged 10,500 units per year, down from an average of 25,000 units from 2000 to 2006.

During 2016:

Class A completions soared by 84.4%, to 3,937 units.

Class B completions soared by 42.4%, to 7,162 units.

Class C completions dropped 35.5%, to 1,413 units.

Class D completions dropped 9.9%, to 1,325 units.

Class E completions rose by 67.3%, to 758 units.

Likewise, housing starts in Hong Kong surged 80% to 25,500 units in 2016 from a year earlier – the highest level since 2000, according to the Transport and Housing Bureau.

How to solve Hong Kong´s housing crisis?

“The housing problem in Hong Kong boils down to land use, which is not a technical issue, but a conceptual one,” Leung said.

Almost all land in Hong Kong is owned by the government but leased out for private use.

The government’s plan is to sell 28 new land sites for private housing during the fiscal year 2017-18, which is projected to provide almost 19,000 new flats. The total land supply for private housing, which includes urban renewal, private redevelopment projects, and railway property, is expected to be sufficient to build almost 32,000 new flats this fiscal year.

Recently, the government unveiled a plan to build about 460,000 units over the next decade, including 200,000 public rental housing units and 80,000 subsidized sale flats. In the private sector, around 94,000 units are expected to become available to buyers in the next three to four years.

In 2015, the total housing stock stood at 1,145,454 units, a 1% increase from the previous year.

Modest economic growth

Hong Kong´s economy grew 1.9% in 2016, after growth rates of 2.4% in 2015, 2.7% in 2014, 3.1% in 2013, and 1.7% in 2012, according to the Census and Statistics Department.

The country’s merchandise exports declined by 0.5% in 2016, after falling by 1.8% in 2015, while merchandise imports fell by 0.9% after declining by 4.1%.Retail sales dropped 8.1% in 2016.

Visitor arrivals dropped 4.5% y-o-y in 2016, after falling by 2.5% in 2015 and the worst figures since 2003 when the city was struck by the deadly severe acute respiratory syndrome (SARS) outbreak, according the Tourism Board. The decline was mainly due to a slowdown in the number of tourists from Mainland China, which account for almost 80% of all visitor arrivals in Hong Kong.

Tourism Board chairman Peter Lam Kin-ngok expects 2017 to be another challenging year for the tourism sector, as its strong currency, pegged to the US Dollar, has made Hong Kong expensive for overseas travellers, especially those from the mainland.

Nevertheless the economy is expected improve this year, with projected GDP growth of 2% to 3%, according to government estimates. This is in line with the International Monetary Fund (IMF)’s projection of a 2.4% growth this year. During the first two months of 2017, both merchandise exports and imports increased 6.7% and 9.3%, respectively.

Hong Kong’s small open economy depends largely on variables it cannot control – tourist spending, trade income, and foreign money inflows. With an average real GDP growth rate of 7.4% from 2004 to 2007, growth slowed to 2.1% in 2008, and then contracted by 2.5% in 2009. The economy bounced back strongly, with real GDP growth rates of 6.8% in 2010, and another 4.9% in 2011, according to the IMF.

In March 2017, inflation eased to 0.5%, from 2.9% in the same period last year, according to the Census and Statistics Department. The country’s inflation rate averaged 4% from 2011 to 2016.

HK’s overall inflation rate is projected at 2.6% this year and 2.7% in 2018, according to the IMF.

The country’s jobless rate remains low. Unemployment was 3.2% in Q1 2017, down from 3.4% in the same period last year, according to the Census and Statistics Department. Hong Kong’s unemployment rate averaged 3.5% from 2010 to 2016, down from an average of 5.5% from 2000 to 2009, according to the IMF.